Articles

The Latest Word On Noncompetes In Minnesota: Medtronic V. Hughes

Charles A. Horowitz

For reasons possibly related to the current economic climate, noncompetition enforcement actions continue to wend their way through the courts in Minnesota. This article will discuss the most recent, high-profile decision of Medtronic, Inc. v. Hughes, 2011 WL 134973 (Minn. Ct. App. 2011). Although not groundbreaking to the extent of setting forth any major new legal doctrines, the case provides significant guidance as which post-employment restrictions on competition will and will not hold up in court. The answer presents a mixed bag for employers and employees. The case also underscores the risks involved in hiring an employee who is subject to an enforceable noncompete.

The Background

The defendant in the case, James Michael Hughes, was a long-term Medtronic employee involved in the sale of cardiac rhythm disease management (CRDM) devices. In his last position with the company, he served as a district manager for a region covering a portion of Alabama. In 2002, he was given the option of signing an expanded, two year non-compete to replace a less restrictive predecessor. As compensation for signing, he was offered $50,000 worth of restricted Medtronic stock. He accepted. The new noncompete prohibited him from selling CRDM devices for a competitor anywhere in the world for a period of two years after his separation from Medtronic. In 2008, he was recruited to and accepted a position with a direct competitor, St. Jude Medical S.C., Inc., as CRDM sales manager for the company's Orlando region. Aware of the noncompete, St. Jude proposed to Medtronic a compromise to avoid litigation under which Hughes would, among other things, refrain from managing any St. Jude employees responsible for accounts formerly serviced by Hughes. Medtronic rejected any out of court resolution, resulting in the instigation of a lawsuit by Medtronic to prevent Hughes from breaching the noncompete.

The Holding

The court began its decision with the legal clichs that noncompetes are "disfavored under the law" as "partial restraints of trade," enforceable only "to the extent reasonably necessary to protect legitimate business interests." These interests include a company's goodwill, trade secrets, and confidential information. Moving to the facts at hand, the court upheld Medtronic's worldwide restriction on competition, as opposed to one covering (say) just the state of Alabama. In so ruling, the court emphasized that the restriction only encompassed sales of CRDM devices. Hughes remained free to sell any number of other medical devices within St. Jude's product portfolio. The court was also impressed by the fact that Hughes was a high-level employee who had access to confidential marketing plans and other trade secrets.

In the case below, the trial court held that the two year restriction broader than reasonably necessary, and reduced it under the "blue pencil" doctrine (allowing courts to re-write overly broad noncompetes) from two years to one year in duration. The Court of Appeals agreed, and declined the employee's request to reduce the length further to six months. Unfortunately, the published decision fails to disclose the court's rationale for the two years to one year reduction.

Finally, the Court of Appeals affirmed an award for the prevailing party, Medtronic, in an amount of $615,958 based on Medtronic's legal claim of tortious interference with contract. The court concluded that St. Jude intentionally procured from Hughes a breach of Hughes' noncompete with Medtronic. Interestingly, the decision contains no mention of attorney fees having been awarded on a contractual basis. Many, but not all, noncompetition agreements contain provisions requiring a breaching employee to reimburse an employer for any costs and attorney fees resulting from litigation to enforce the agreement.

The Takeaway

The decision provides useful and timely reminders concerning Minnesota noncompete law.

I. Independent Consideration

If a noncompete is not signed before the employee commences employment, the employer must provide "independent consideration," meaning something of value other than the mere continuation of employment, in order for it to be enforceable. Here, the employer offered $50,000 in stock options. Court decisions give no clear guidance as to minimum consideration sufficient for this purpose, but in general, it is best to err on the side of generosity. A signing bonus under $1,000 could risk a pro-employee court ruling rendering the noncompete unenforceable. Although not an issue in the Medtronic case, Minnesota law also generally requires an employee be notified of the noncompete in advance of accepting an offer of employment. The disclosure should provide the material terms of the noncompete, including at least the scope of its coverage, its length and geographic scope. This is best accomplished through direct communication, such as a phone call or email, followed by a formal offer letter setting forth these details.

II. Geographic Scope

The case stands as reminder that the appropriate geographic scope is determined on a case-by-case, industry-by-industry basis. Whereas the appropriate geographic restriction for a hair stylist may be measured in square miles or even city blocks, the appropriate restriction for a software engineer may be nationwide or even worldwide. In the Medtronic case, the court took care to study the nature of the industry, the level of the employee involved, and substance of trade secrets known to the employee, in order to assess the potential competitive harm. By implication, a less onerous restriction would be applicable for a lower level employee in CRDM sales with less access to competitive information.

III. Duration

According to the court, Medtronic overreached in subjecting its high-level sales employees to a two-year noncompete, despite having compensated them to the tune of $50,000 in stock options. The ruling presents a cautionary tale for smaller companies less able to bear the half-million dollar plus cost of litigation. For such companies, it is best to carefully assess how long a proposed noncompete must be to protect the business under a "reasonably necessary" standard. A review of published court decisions reveals that one year noncompetes are routinely upheld. Two year noncompetes are far less common, and whether they will hold up in court will depend on the particular facts of the case. Presumably here, the court determined the medical device industry to be a dynamic market. If factors going into business plans change rapidly, then "trade secrets" known to even the highest level sales managers grow stale after about a year, but not after six months.

IV. Considerations in Hiring and Recruitment

The Medtronic case highlights the high-stakes nature of recruiting an employee subject to a noncompete. As part of the initial interview, employers should ask the prospective employee if he or she is subject to a noncompete and, if so, to obtain a copy of it prior to extending any offer of employment. Depending on how valuable and unique the employee's skills, it may make sense at that point to obtain a legal opinion as to the noncompete's enforceability. Whether or not the employee is subject to a noncompete, the employers should also determine the appropriateness of a noncompete for the job. Many employers these days paint with too broad a brush, subjecting employees in multiple classifications to noncompetes. Across-the-board, companywide noncompetes are, generally speaking, bad for reasons of morale and attracting talent. (Whereas losing your lead salesperson, programmer or engineer to competitor could be a "bet the business" proposition, the same cannot be said for most security guards, assemblers and secretarial staff.) The questions asked should include: "If Employee X leaves to work for Company Y, will he/she hurt us, how, how badly and for how long?" If the answer to the first question is "no," then you should not subject the employee to a noncompete. Answers to the other questions will determine the appropriate nature and scope. Although the Medtronic agreement was too long, the company scored "points" with the court by carefully crafting an agreement that covered just one product group.

The employment lawyers Mansfield Tanick & Cohen, P.A. are available to assist employers and employees alike in the drafting, legal enforcement, negotiation or avoidance of noncompetes.

Charles A. Horowitz is a partner with MT&C, practicing in the areas of employment law, insurance law, business litigation, shareholder litigation and class actions. He can be reached at 800-401-6194 or via email at chorowitz@mansfieldtanick.com.